China PMIs: Has The Recovery Peaked?

By Orbex

This week, we will get the release of both the official and private measures of China’s PMIs.

The consensus is for both the manufacturing and services components to show a downward move, though still stay marginally in expansion.

That said, the rest of the world is concerned with China’s relatively slow economic acceleration. This can be attributed to a number of factors. Particularly because China is the world’s manufacturing base and for the most part, they have avoided a second covid wave,

Furthermore, China is one of the leading commodities buyers and also has the ability to influence currencies like the Australian and Canadian dollar.

Overall, this could be a sign that major retailers across the world are not seeing a sufficient increase in consumer demand in order to front-load orders.

So what can we expect from China’s PMIs?

The widening gap

In contrast, PMIs in Europe have hit record highs in anticipation of pent-up demand from consumers.

Nonetheless, Chinese manufacturers remain stubbornly neutral. However, PMIs in China haven’t been surging forward. Instead, they’ve hovered around the 50-55 range, which is more technically in expansion, rather than solidly in expansion.

Chinese manufacturing has, of course, been squeezed at both ends: with the rest of the world under lockdowns from covid, there was less demand.

On the other hand, increasing prices in raw materials pressure margins. With less free cash flow, purchasing managers might be less willing to buy and drive the economy.

Getting a handle on the trends

Last summer, optimism increased as the first wave of the pandemic ended.

In fact, PMIs in China shot higher in anticipation of a return in demand. However, the second and third waves brought an end to that optimism. Indeed, even China renewed restrictions due to a rise in covid cases during the winter.

Naturally, PMIs dropped, but not into contraction. Since the vaccine rollout and drop in global cases, the expectation would be for PMIs to return to their optimistic trajectory. May’s figure appeared to be going in that direction but was still far from the highs seen last year.

More importantly, the consensus of a drop in PMIs suggests that maybe global economic growth isn’t as good as it was previously anticipated. Should PMIs not recover significantly, we could be looking at a slower recovery both in China and the rest of the world.

Admittedly, traders might want to keep an eye out for a potential drop in risk sentiment following the data.

What we are looking for

Experts anticipate the official NBS Manufacturing PMI to have a marginal decline to 50.8 compared to 51.0 in May. Additionally, they expect a similar situation for the Non-Manufacturing component. Indeed, they expect it to come in at 55.2 compared to the prior 55.2.

Moreover, we can presume that the private Caixin measure dropped slightly to 51.8 compared to the previous 51.0. Generally, the official measure is more optimistic.

However, it measures larger, state-run companies that typically are more reliant on high-volume exports. Economists also reckon for the Caixin Services PMI to slip slightly to 55.0 from 55.1.

By Orbex